<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1996
------------------
[ ] Transition Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _________ to _________
Commission file number: 0-17927
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JANEX INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Colorado 84-1034251
- ------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
21700 Oxnard Street, Suite 1610, Woodland Hills, California 91367
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Issuer's telephone number, including area code: (818) 593-6777
--------------
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
As of October 31, 1996, the issuer had 5,046,721 shares of its common stock
outstanding.
Transitional Small Business Disclosure Format:
Yes No X
----- -----
Total sequentially numbered pages in this document: 20.
1
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JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Sequential
Page
Numbers
-------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance
Sheets (Unaudited) - December 31,
1995 and September 30, 1996 3 - 4
Condensed Consolidated Statements of
Operations (Unaudited) - Three and Nine
Months Ended September 30, 1995 and 1996 5
Condensed Consolidated Statements of
Cash Flows (Unaudited) - Nine Months
Ended September 30, 1995 and 1996 6 - 7
Notes to Condensed Consolidated
Financial Statements (Unaudited) -
Nine Months Ended September 30, 1995
and 1996 8 - 13
Item 2. Management's Discussion and
Analysis or Plan of Operation 14 - 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
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JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
September December
30, 1996 31, 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 123,992 $ 783,564
Certificate of deposit (Note 5) 500,000 500,000
Accounts receivable, net 1,055,525 494,987
Inventories - principally
finished goods 367,901 605,623
Prepaid royalties 237,995 119,995
Other current assets 180,990 143,761
---------- ----------
Total current assets 2,466,403 2,647,930
Property and equipment, net 667,697 359,674
Intangible assets, net 2,077,475 2,245,352
Product development costs, net 163,509 184,026
Other assets 5,900 11,985
---------- ----------
$5,380,984 $5,448,967
========== ==========
</TABLE>
(continued)
3
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
September December
30, 1996 31, 1995
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loan payable - bank (Note 5) $ 400,000 $ 751,425
Notes payable - stockholders -- 458,760
Loan payable - agent (Note 6) 282,333
Note payable 220,197 500,000
Accounts payable 894,230 355,834
Accrued expenses 745,645 503,715
Income taxes payable 19,112 6,586
----------- -----------
Total current liabilities 2,561,517 2,576,320
----------- -----------
Notes payable - stockholders 758,760
(Note 7)
Commitments and contingencies
(Notes 2 and 3)
Stockholders' equity (Note 4):
Class A convertible preferred
stock, no par value;
authorized - 5,000,000 shares;
issued and outstanding - none
Common stock, no par value;
authorized - 20,000,000 shares;
issued and outstanding -
5,046,721 shares 11,138,941 11,054,816
Accumulated deficit (9,078,234) (8,182,169)
----------- -----------
Total stockholders' equity 2,060,707 2,872,647
----------- -----------
$ 5,380,984 $ 5,448,967
=========== ===========
</TABLE>
See accompanying notes to condensed
consolidated financial statements.
4
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JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $2,978,023 $4,530,727 $6,315,061 $7,593,812
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of sales 1,697,104 2,473,978 3,597,849 4,084,638
Selling, general and
administrative 1,267,796 1,218,009 2,915,667 2,787,240
Royalty Expense 335,383 553,435 566,913 963,981
---------- ---------- ---------- ----------
Total costs and expenses 3,300,283 4,245,422 7,080,429 7,835,859
---------- ---------- ---------- ----------
OPERATING (LOSS) INCOME (322,260) 285,305 (765,368) (242,047)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest Income 6,692 10,143 31,146 42,996
Interest Expense (41,700) (25,665) (88,663) (57,758)
Foreign exchange gain 6,392 - 24,173 -
Loss from settlement
w/warrant holder - - (84,125) -
---------- ---------- ---------- -----------
Total other income
(expense) (28,616) (15,522) (117,469) (14,762)
---------- ---------- ---------- ----------
(LOSS) INCOME BEFORE
INCOME TAX (350,876) 269,783 (882,837) (256,809)
INCOME TAX 6,817 30,634 13,228 33,787
---------- ---------- ---------- ----------
NET (LOSS) INCOME $ (357,693) $ 239,149 $ (896,065) $ (290,596)
========== ========== ========== ==========
(LOSS) INCOME PER COMMON
SHARE:
Primary $ (0.07) $ 0.04 $ (0.18) $ (0.06)
========== ========== ========== ==========
Weighted average number of
primary shares
outstanding 5,046,721 5,352,629 5,046,721 4,810,860
========= ========= ========= =========
Fully diluted $ (0.07) $ 0.04 $ (0.18) $ (0.06)
=========== ========== ========== ==========
Weighted average number of
fully diluted shares
outstanding 5,046,721 5,425,552 5,046,721 4,810,860
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(896,065) $(290,596)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities:
Provision for losses on
accounts receivable, net (75,856) 179,555
Amortization 388,539 325,002
Depreciation 113,154 206,884
Foreign exchange loss
Loss from settlement with
warrant holder 84,125 --
Changes in operating assets
and liabilities:
(Increase) decrease in -
Accounts receivable (484,682) (545,444)
Inventories 237,722 (449,486)
Prepaid royalties (118,000) (87,467)
Other current assets (37,229) (10,536)
Other assets 6,085 (1,779)
Increase (decrease) in -
Accounts payable 538,396 (129,826)
Accrued expenses 241,930 407,698
Income taxes payable 12,526 21
--------- ---------
Net cash provided by (used in)
operating activities 10,645 (395,974)
--------- ---------
Cash flows from investing activities:
Additio ns to property and
equipment (421,177) (363,075)
Additions to product
development costs (200,145) (266,809)
Term Deposit -- (100,000)
Purchase of Malibu Fun Stuffed,
net of cash acquired -- (54,897)
--------- ---------
Net cash (used in) investing
activities (621,322) (784,781)
--------- ---------
</TABLE>
6
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from exercise of common
stock purchase warrants $ $ 96,000
Repayment of loan payable - bank (351,425) --
Proceeds from loan payable -
shareholder 300,000 --
Proceeds from loan payable -
agent 282,333 --
Proceeds from bank loan -- 725,000
Payment of shareholder
note payable -- (139,150
Repayment of note payable (279,803) --
--------- ---------
Net cash provided by (used in)
financing activities (48,895) 681,842
--------- ---------
Cash and cash equivalents:
Net decrease (659,572) (498,913)
At beginning of period 783,564 1,072,021
--------- ----------
At end of period $ 123,992 $ 573,108
========= ==========
</TABLE>
See accompanying notes to condensed
consolidated financial statements.
7
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization - Janex International, Inc. was incorporated in Colorado on July
- ------------
28, 1986, and is the parent corporation of With Design in Mind, a California
corporation, Janex Corporation ("Janex"), a New Jersey corporation, and Malibu
Fun Stuffed ("Malibu"), a California corporation, all of which are wholly-owned
subsidiaries. Janex International, Inc. is also the parent corporation of Pro
Gains Company Limited ("Pro Gains"), a Hong Kong corporation, owned 50% by Janex
International, Inc. and 50% by Janex. Malibu Fun Stuffed International Limited
("MFSI"), a Hong Kong corporation, is owned 99% by Malibu and 1% by Janex
International, Inc. As used in this report, the "Company" refers to Janex
International, Inc. and its subsidiaries, unless the context indicates
otherwise.
Business - The Company's business is conducted primarily through its
- --------
subsidiaries, Janex, Pro Gains, Malibu and MFSI, and consists mainly of
developing, manufacturing (through subcontractors), marketing and selling toys
and functional children's products ("Children's Products"). These products
include (1) coin and gumball banks, flashlights, battery-operated toothbrushes
and clocks marketed under the brand name "Janex" and (2) plush, pool toys, video
sets and children's watches marketed under the brand name "Malibu Fun Stuffed!",
all of which retail for prices between $3 and $40. The Children's Products are
manufactured to the Company's specifications by manufacturers based in Macau,
China and the United States, and are sold nationwide to mass merchant retailers,
toy specialty stores, department stores and gift shops through a network of
independent sales representative firms.
Basis of Presentation - The accompanying consolidated financial statements are
- ---------------------
unaudited but, in the opinion of management of the Company, contain all
adjustments necessary to present fairly the financial position at September 30,
1996, the results of operations for the three and nine months ended September
30, 1996 and 1995, and the changes in cash flows for the nine months ended
September 30, 1996 and 1995. These adjustments are of a normal recurring
nature. The consolidated balance sheet as of December 31, 1995 is derived from
the Company's audited financial statements. The accompanying consolidated
financial statements include the operations of the Company and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
8
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JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
Certain information and footnote disclosures normally included in financial
statements that have been prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission, although management of
the Company believes that the disclosures contained in these financial
statements are adequate to make the information presented therein not
misleading. For further information, refer to the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form 10-
KSB for the fiscal year ended December 31, 1995, as filed with the Securities
and Exchange Commission.
Seasonality - Because of the seasonality of the Company's business, the results
- -----------
of operations for the three and nine months ended September 30, 1996 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year ending December 31, 1996.
Net Income (Loss) Per Share - Net income (loss) per share is based on the
- ---------------------------
weighted average number of shares of common stock outstanding during the
respective periods presented. Common stock equivalents are not included in the
calculation of income (loss) per share as their effect would be anti-dilutive or
it is not material.
Pro Forma Information - Malibu and its affiliate, MFSI, were acquired in August
- ---------------------
1995 in a transaction accounted for under the purchase method of accounting. As
the combined results of operations of Malibu and MFSI during 1995 were not
material in relation to the Company's consolidated results of operations, 1995
pro forma financial information is not presented.
2. GOING CONCERN
The Company has suffered losses from operations in two out of the last
three fiscal years, and had a net loss of $896,065 and a negative cash flow of
$659,572 for nine months ended September 30, 1996. The Company's net working
capital decreased by $166,724, from working capital of $71,610 at December 31,
1995 to a working capital deficit of $95,114 at September 30, 1996. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The accompanying
9
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
2. GOING CONCERN (continued)
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
The Company has been able to continue in operation through the financial
support provided by a combination of debt and equity financing. Continued
operations depend upon the Company continuing to obtain financing for its
activities. Management's plan for the Company includes raising additional
working capital through debt and/or equity financing until profitable operations
and positive cash flow are achieved and maintained, which management believes
are in the near future. However, no assurances can be given that the Company
will be successful in raising additional capital. Further, should the Company be
successful in raising additional capital, there is no assurance that the Company
will achieve profitability or positive cash flow. If the Company is unable to
obtain adequate additional financing, management will be required to curtail the
operations of the Company.
3. LEGAL PROCEEDINGS
On May 27, 1993, a class action lawsuit (the "Lawsuit") was filed by Kevin
J. O'Rourke and Patricia Ann O'Rourke (the "Plaintiffs") against the Company and
other parties in the United States District Court for the Central District of
California (the "Court"). On May 24, 1994, on Motion by the Company, the
Lawsuit was dismissed, but the Plaintiffs were given 45 days to amend their
complaint. On July 8, 1994, the Plaintiffs filed their Second Amended
Complaint. Thereafter, settlement negotiations ensued without success. On May
6, 1996, the Plaintiffs filed a voluntary Request for Dismissal of the Lawsuit,
which the Court entered without prejudice on May 7, 1996.
4. WARRANT AGREEMENT AND SETTLEMENT
Under the terms of the warrant agreement granting Deco Disc warrants to
purchase 500,000 shares of the Company's common stock (the "Warrant Agreement"),
the Company was obligated to register the stock underlying the warrants, and to
use its best efforts to maintain the registration statement effective during the
period the warrants are exercisable. Deco Disc threatened to sue the Company,
claiming that the Company did not file the registration
10
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
4. WARRANT AGREEMENT AND SETTLEMENT (continued)
statement on a timely basis, and that the registration statement was not kept
effective by the Company, resulting in Deco Disc being damaged. In order to
avoid any potential litigation, on March 26, 1996, the Company and Deco Disc
entered into a Settlement Agreement and Specific Release under which the Company
issued to Deco Disc additional warrants to purchase 100,000 shares of the
Company's common stock (restricted), with certain "piggy-back" registration
rights, at a price of $.64 per share, in exchange for Deco Disc releasing the
Company from any and all prior claims relating to violations of the Warrant
Agreement, and failure to update the registration statement. As a result of the
foregoing transaction, during the nine months ended September 30, 1996, the
Company recorded a charge to operations of $84,125 as management's estimate of
the fair value of the 100,000 common stock purchase warrants.
5. LOAN PAYABLE - BANK
The Company had a $1,000,000 line of credit with a bank with interest at
9.5%, pursuant to a loan agreement which expired on May 3, 1996. The line of
credit is secured by a $500,000 certificate of deposit purchased from the bank
and a first priority security interest in all of the assets of the Company. The
outstanding balance on the line of credit was $751,425 at December 31, 1995. On
March 20, 1996, the Company and the bank agreed to reduce the amount available
under the line of credit to $500,000 (including the ability of the Company to
utilize the line of credit to issue up to $100,000 of stand-by letters of
credit), and the bank waived certain covenant violations under the original loan
agreement. Accordingly, at September 30, 1996, the outstanding balance under
the line of credit had been reduced by $351,425 to $400,000. The Company
recently has concluded negotiations with the bank to extend the maturity date to
May 7, 1997, with all other terms of the loan remaining the same.
6. LOAN PAYABLE - AGENT
Pursuant to an Agency Agreement dated October 23, 1995, the Company,
through its Hong Kong subsidiaries, Pro Gains and MFSI, may borrow up to
$300,000 from its Hong Kong agent for the
11
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
6. LOAN PAYABLE - AGENT (continued)
payment of product development and tooling costs, provided that the Company
issues to the agent an irrevocable stand-by letter of credit for $100,000. The
loan is to be repaid from collections of certain customer invoices at the rate
of 5% of the invoice amount, with interest at 2% above the Hong Kong prime rate,
and any balance remaining unpaid at December 31, 1996 will be due and payable on
January 15, 1997. The agent will retain ownership of all tooling paid for with
the credit facility until the credit facility is repaid. The credit facility is
available in each year that the Agency Agreement is in effect, which was for an
initial term of two years. On March 22, 1996, the Company opened the stand-by
letter of credit to the agent. As of September 30, 1996, the Company had
borrowed $282,333 under this credit facility.
7. NOTES PAYABLE - STOCKHOLDERS
Effective as of April 19, 1996, pursuant to a Revolving Credit Agreement with an
individual lender (who is also a significant shareholder of the Company) (the
"Lender") that expires on October 19, 1999 (the "Agreement"), Janex Corporation
arranged to borrow up to $900,000, with interest at 9.5% payable quarterly. The
Agreement is secured by all of the assets of Janex Corporation, and the guaranty
of Janex International, Inc. As additional consideration, the Company granted
the Lender warrants to purchase up to 900,000 shares of the Company's common
stock (restricted), with certain "piggy-back" registration rights, exercisable
at a price of $1.45 per share through April 19, 2000. The warrants vest in equal
increments of 180,000 on the first day of consecutive six-month periods
commencing April 19, 1996. However, to the extent that amounts borrowed under
the Agreement are paid off and the Agreement is canceled during its term, any
unvested warrants shall be void. As of September 30, 1996, the Company had
borrowed $300,000 pursuant to this Agreement.
Under the terms of the stock purchase agreement for the acquisition of Janex,
the Company issued two promissory notes totalling $1,000,000, payable in semi-
annual installments over a three year period (at December 31, 1995, the amount
payable was $458,760, representing the present value of the future payments
under the obligation discount at 9%, not including imputed interest accrued but
not paid). The first three payments of $166,667 each under the $1,000,000 note
were made on June 30,
12
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
7. NOTES PAYABLE - STOCKHOLDERS (continued)
1994, December 31, 1994, and June 30, 1995. On December 29, 1995, the holders
of the $1,000,000 of notes agreed to a deferral of the payment due on December
31, 1995, to June 30, 1996. As a condition of the deferral, the Company agreed
to pay the note holders interest on the deferred payments at the rate of 9% per
annum from December 31, 1995 to the date of payment. On June 28, 1996, the note
holders agreed to further extend the payment date for all remaining payments to
February 1, 1998, subject to payment of interest at the rate of 9.5% per annum,
retroactive to January 1, 1996. Quarterly interest payments are to commence on
September 1, 1996. The Company also agreed to provide the note holders with
security for the notes. Further, in connection with the extension of the notes,
the Company entered into a warrant agreement with each of the note holders,
providing for the issuance of up to 282,994 warrants to one of them and up to
167,994 warrants to the other, to acquire a total of 450,998 shares of the Janex
International Common Stock (restricted), exercisable at a price of $1.45 per
share through June 28,2000, with certain "piggy-back" registration rights. The
warrants vest in 6-month increments over the term of the loan, and if the loan
is paid off early, certain of the warrants will be void.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Consolidated Results of Operations - Nine Months Ended September 30, 1996 and
1995:
Net Sales
- ---------
For the nine months ended September 30, 1996, sales decreased by $1,278,751
or 16.8%, to $6,315,061, as compared to sales of 7,593,812 for the nine months
ended September 30, 1995. The decrease in sales is a result primarily of the
lack of any exciting licenses during the current period. The Walt Disney
Company's "Hunchback of Notre Dame" has not met the retailers' expectations and,
as a result, many of the major customers of the Company have not been willing to
make large inventory commitments. A substantial portion of 1996 net sales
consisted of products incorporating characters licensed from The Walt Disney
Company (37%) and the "Looney Tunes" characters licensed from Warner Bros.
Corporation (42%), whereas a substantial portion of 1995 net sales consisted of
products incorporating characters licensed from The Walt Disney Company (44%)
and characters featured on the television show Mighty Morphin Power Rangers
(34%).
At September 30, 1996, the Company had a backlog of unfilled orders of
approximately $1.2 million comparable with its order backlog of approximately
$2.0 million at September 30, 1995. Although orders are booked throughout the
fiscal year, historically as much as 50% of the Company's business is booked
during the second fiscal quarter. Although the Company has noted a general
slowdown in order flow in 1996 as compared to prior years, the present backlog
is not necessarily indicative of net sales to be expected for the full fiscal
year ending December 31, 1996.
Gross Profit
- ------------
For the nine months ended September 30, 1996, gross profit was $2,717,212
or 43.0% of sales, as compared to $3,509,174 or 46.2% of sales for the nine
months ended September 30, 1995. The Company typically establishes prices to
obtain a target gross margin ranging from 45% to 50%, but overall gross margin
can vary depending on the sales mix in each quarter. The decrease in gross
margin in 1996 as compared to 1995 was primarily the result of the Company
taking markdowns in 1996 to close out certain slow-moving inventory.
14
<PAGE>
Selling, General and Administrative Expenses
- --------------------------------------------
For the nine months ended September 30, 1996, selling, general and
administrative expenses increased by $128,427 or 4.6%, to $2,915,667 or 46.17%
of net sales, as compared to $2,787,240 or 36.7% of net sales for the nine
months ended September 30, 1995. Selling, general and administrative expenses
are comprised of fixed overhead costs and variable selling expenses. The
increase in selling, general and administrative expenses is consistent with the
increase in additional costs relating to Malibu Fun Stuffed and Malibu Fun
Stuffed International.
Royalty Expense
- ---------------
For the nine months ended September 30, 1996, royalty expense was $566,913
or 8.9% of sales, as compared to $963,981 or 12.7% of sales for the nine months
ended September 30, 1995. Typical royalty contracts include royalty rates
ranging from 8% to 16%. The decrease in royalty expense in 1996 as compared to
1995 was primarily the result of a shift in the sales mix in 1996 to a higher
proportion of non-royalty sales, which included sales to Europe and sales by
Malibu Fun Stuffed and Malibu Fun Stuffed International Limited.
Loss from Settlement with Warrant Holder
- ----------------------------------------
Under the terms of the warrant agreement granting Deco Disc warrants to
purchase 500,000 shares of the Company's common stock (the "Warrant Agreement"),
the Company was obligated to register the stock underlying the warrants, and to
use its best efforts to maintain the registration statement effective during the
period the warrants are exercisable. Deco Disc threatened to sue the Company,
claiming that the Company did not file the registration statement on a timely
basis, and that the registration statement was not kept effective by the
Company, resulting in Deco Disc being damaged. In order to avoid any potential
litigation, on March 26, 1996, the Company and Deco Disc entered into a
Settlement Agreement and Specific Release under which the Company issued to Deco
Disc additional warrants to purchase 100,000 shares of the Company's common
stock (restricted), with certain "piggy-back" registration rights, at a price of
$.64 per share, in exchange for Deco Disc releasing the Company from any and all
prior claims relating to violations of the Warrant Agreement, and failure to
update the registration statement. As a result of the foregoing transaction,
during the nine months ended September 30, 1996, the Company recorded a charge
to operations of $84,125 as management's estimate of the fair value of the
100,000 common stock purchase warrants.
15
<PAGE>
Net Loss
- --------
The reasons for the increase in net loss in 1996 as compared to 1995 are
summarized above. For the nine months ended September 30, 1996, the net loss
was $896,065, or $.18 per share, as compared to a net loss of $290,596 or $.06
per share, for the nine months ended September 30, 1995.
Consolidated Financial Condition - September 30, 1996:
Liquidity and Capital Resources
- -------------------------------
The Company's cash balance decreased by $659,572 to $123,992 at September
30, 1996, as compared to $783,564 at December 31, 1995. The Company's net
working capital decreased by $166,724, from working capital of $71,610 at
December 31, 1995 to a working capital deficit of $95,114 at September 30, 1996,
and the Company's current ratio decreased to 0.96:1 at September 30, 1996 as
compared to 1.028:1 at December 31, 1995. For the nine months ended September
30, 1996, the Company's operations provided cash resources of $10,645, as
compared to utilizing cash resources of $395,974 for the nine months ended
September 30, 1995, primarily as a result of a decrease in inventories, an
increase in accounts receivable and an increase in accounts payable during the
nine months ended September 30, 1996.
During the nine months ended September 30, 1996, as part of the Company's
continuing program of capital investment in new products and licenses, the
Company incurred additions to property and equipment, reflecting tooling and
molds related to new licenses, of $421,177, and additions to product development
costs of $200,145.
Under the terms of the stock purchase agreement for the acquisition of
Janex, the Company issued two promissory notes totalling $1,000,000, payable in
semi-annual installments over a three year period (at December 31, 1995, the
amount payable was $458,760, representing the present value of the future
payments under the obligation discount at 9%, not including imputed interest
accrued but not paid). The first three payments of $166,667 each under the
$1,000,000 note were made on June 30, 1994, December 31, 1994, and June 30,
1995. On December 29, 1995, the holders of the $1,000,000 of notes agreed to a
deferral of the payment due on December 31, 1995, to June 30, 1996. As a
condition of the deferral, the Company agreed to pay the note holders interest
on the deferred payments at the rate of 9% per annum from December 31, 1995 to
the date of payment. On June 28, 1996, the note holders agreed to further
extend the payment date for all remaining payments to February 1, 1998, subject
to payment of interest at the rate of 9.5% per annum, retroactive to
16
<PAGE>
January 1, 1996. Quarterly interest payments are to commence on September 1,
1996. The Company also agreed to provide the note holders with security for the
notes. Further, in connection with the extension of the notes, the Company
entered into a warrant agreement with each of the note holders, providing for
the issuance of up to 282,994 warrants to one of them and up to 167,994 warrants
to the other, to acquire a total of 450,998 shares of the Janex International
Common Stock (restricted), exercisable at a price of $1.45 per share through
June 28,2000, with certain "piggy-back" registration rights. The warrants vest
in 6-month increments over the term of the loan, and if the loan is paid off
early, certain of the warrants will be void.
The Company had a $1,000,000 line of credit with a bank with interest at
9.5%, pursuant to a loan agreement which expired on May 3, 1996. The line of
credit is secured by a $500,000 certificate of deposit purchased from the bank
and a first priority security interest in all of the assets of the Company. The
outstanding balance on the line of credit was $751,425 at December 31, 1995. On
March 20, 1996, the Company and the bank agreed to reduce the amount available
under the line of credit to $500,000 (including the ability of the Company to
utilize the line of credit to issue up to $100,000 of stand-by letters of
credit), and the bank waived certain covenant violations under the original loan
agreement. Accordingly, at September 30, 1996, the outstanding balance under
the line of credit had been reduced by $351,425 to $400,000. The Company
recently concluded negotiations with the bank to extend the maturity date to May
7, 1997, with all other terms of the loan remaining the same.
On December 22, 1995, the Company borrowed $500,000 in a private unsecured
loan transaction, with interest at prime plus 2%. Under the terms of the loan
agreement, payments are to be made on a periodic basis based upon the level of
certain sales. If the loan is not fully repaid by October 1, 1996, the remaining
balance becomes immediately due and payable. At September 30, 1996, the
outstanding balance on this loan was $220,197.
Pursuant to an Agency Agreement dated October 23, 1995, the Company,
through its Hong Kong subsidiaries, Pro Gains and MFSI, may borrow up to
$300,000 from its Hong Kong agent for the payment of product development and
tooling costs, provided that the Company issues to the agent an irrevocable
stand-by letter of credit for $100,000. The loan is to be repaid from
collections of certain customer invoices at the rate of 5% of the invoice
amount, with interest at 2% above the Hong Kong prime rate, and any balance
remaining unpaid at December 31, 1996 will be due and payable on January 15,
1997. The agent will retain ownership of all tooling paid for with the credit
facility until the credit facility is repaid. The credit facility is available
in each year that the Agency Agreement is in effect, which was for an initial
term of two years. On March 22, 1996, the Company opened
17
<PAGE>
the stand-by letter of credit to the agent. As of September 30, 1996, the
Company had borrowed $282,333 under this credit facility.
Effective as of April 19, 1996, pursuant to a Revolving Credit Agreement
with an individual lender (who is also a significant shareholder of the Company)
(the "Lender") that expires on September 19, 1998 (the "Agreement"), Janex
Corporation arranged to borrow up to $900,000, with interest at 9.5% payable
quarterly. The Agreement is secured by all of the assets of Janex Corporation,
and the guaranty of Janex International, Inc. As additional consideration, the
Company granted the Lender warrants to purchase up to 900,000 shares of the
Company's common stock (restricted), with certain "piggy-back" registration
rights, exercisable at a price of $1.45 per share through April 19, 2000. The
warrants vest in equal increments of 180,000 on the first day of consecutive
six-month periods commencing April 19, 1996. However, to the extent that
amounts borrowed under the Agreement are paid off and the Agreement is canceled
during its term, any unvested warrants shall be void. As of September 30, 1996,
the Company had borrowed $300,000 pursuant to this Agreement.
The Company believes that its existing cash balance, together with its
lines of credit and cash flow from operations, will be sufficient to fund order
flow and overhead for the remainder of the fiscal year ending December 31, 1996.
In order to fund any potential working capital deficiency that may develop in
1997 as a result of the debt repayment obligations referred to above, the
Company continues to engage in discussions with various financing sources.
Depending on the availability of financing and the results of its operations,
the ability of the Company to fund new licenses and develop new products may be
constrained. There can be no assurances that any additional financing necessary
to fund the debt service obligations and/or the operations of the Company will
be available on a timely basis and/or under acceptable terms and conditions. To
the extent that the Company's sales are limited by the availability of working
capital, the Company would be required to reduce operations to a level
consistent with its available working capital.
18
<PAGE>
PART II. OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K -
Three Months Ended September 30, 1996: Under Item 5
Other Events: None
19
<PAGE>
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
JANEX INTERNATIONAL, INC.
-------------------------
(Registrant)
Date: November 18, 1996 By: /s/Sheldon F. Morick
----------------------
Sheldon F. Morick
President and Director
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 123,992
<SECURITIES> 500,000
<RECEIVABLES> 1,055,525
<ALLOWANCES> 0
<INVENTORY> 367,901
<CURRENT-ASSETS> 2,466,403
<PP&E> 667,697
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,380,984
<CURRENT-LIABILITIES> 2,561,517
<BONDS> 0
0
0
<COMMON> 11,138,941
<OTHER-SE> (9,078,234)
<TOTAL-LIABILITY-AND-EQUITY> 5,380,984
<SALES> 6,315,061
<TOTAL-REVENUES> 6,315,001
<CGS> 3,597,849
<TOTAL-COSTS> 3,597,849
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 88,663
<INCOME-PRETAX> (882,837)
<INCOME-TAX> 13,228
<INCOME-CONTINUING> (896,065)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (896,065)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
